According to a recent AM Best report, last year was the most profitable for the directors and officers (D&O) liability insurance market since 2014, but it may not reflect the challenges that lie ahead for the product line.
Double-digit price increases through 2021 fueled D&O insurers’ top-line premium growth, which is expected to remain near or at 10% in 2022. According to quarterly pricing data from the Council of Insurance Agents and Brokers, premium increases have gradually declined since their peak in the second quarter of 2020. Best warned that the D&O market still faces challenges.
“Excess capacity has been a primary contributor to the disparity between rates and risk exposure pricing, even as the loss ratio crept upward,” said Christopher Graham, senior industry analyst, industry research and analytics, AM Best. “With results worsening due to factors such as social inflation, litigation funding, environmental, social, and governance concerns, and cyber-related claims, insurers have aggressively pushed for higher renewal premiums, higher self-insured retentions, and more-restrictive terms and conditions.”
Best noted that the COVID-19 pandemic and related responses had an impact on the D&O segment. Fiscal and monetary policies aided in mitigating some of the effects. Delays in court cases impacted D&O defense and containment expenses, which increased only 4% in 2021 compared to 39% in 2019 and 14% in 2020. The pandemic also exacerbated some “fundamental issues” in the marketplace by putting financial strain on businesses, particularly those whose finances were already precarious prior to the pandemic.
According to the report, “whether the aggressive pricing increases and higher resulting premiums have sufficiently offset the complex prevailing risk factors for carriers insuring D&O risks remains unclear.” As the benefit of the 2021 price increases is reflected in the earned premium in 2022, the D&O line’s bottom-line profitability in 2022 will indicate whether those actions were sufficient to generate true price adequacy and serve as a springboard for sustained improvement.”
According to the report, increased competition by the end of 2021 likely tempered the magnitude of pricing increases insurers sought relative to the previous 18-24 months. D&O insurers reassessed their desired risk classes and limit profiles, as well as their underwriting strategies, in order to improve underwriting profitability. These initiatives also aided the line’s improved direct profitability.
Best noted that Berkshire Hathaway’s proposed acquisition of Alleghany Corporation would further consolidate an already consolidated market. The top three D&O writers control roughly one-third of the market, and the top 15 control more than two-thirds.